Ever since last winter, or maybe even earlier, the politicians across the land, consumer groups and many others involved in the residential real estateindustry have been talking about how to handle the subprime home loan mess. The Feds have put together task groups to draft new rules and multiple congressional hearings have been held on what type of regulations would be needed. Plenty of manpower, and a lot of time, has been spent on the issue in the last several months.
The effort has finally produced some visible results. In the past month federal and state regulators have separately published their new, more demanding guidelines that cover just about all mortgage originators. A few states are still dragging their feet on it, but are expected to eventually come on board. However, there is one large problem with the guidelines. That's exactly what they are, mere guidelines. They are not enforceable directives. You mean to tell me that all the work was done to just produce some recommendations? Yes. That's true.
Don't worry, though. The subprime tangle is being corrected as we speak. And the one who is doing it is the marketplace. When everybody else was debating what should be done, the Wall Street quietly took charge of the issue and went about fixing it on its own. How is it doing it? The mortgage bankers on Wall Street simply changed the lending guidelines, made them tougher. See, the institutional investors stopped buying mortgage-backed securities on the secondary market underwritten by the old, lenient rules because they were going bad. So, the guidelines had to be adjusted to satisfy the investors. It was just a prudent business decision. That's all.
In essence, when you look at the big picture, the marketplace has been way ahead of the regulators to sort this thing out. In some cases lenders have even gone beyond what the recent federal and state guidelines have asked for. They want to make sure the loans they package for the secondary market will sell.